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Is Rise in Unemployment Good?

The U.S. unemployment rate rose in June. But this is good for the economy. What? Good? How is that?

Unemployment Increases, but It’s Positive

499,000. So many more people became unemployed in June. There are thus 6.6 million unemployed persons in the U.S. now, according to the latest Employment Situation Report published last week by the Bureau of Labor Statistics. It implies the rate of unemployment at 4.0 percent in June, an increase of 0.2 percentage points from May, as one can see in the chart below.

Chart 1: U.S. unemployment rate (red line, left axis, U-3, in %) and total nonfarm payrolls percent change from year ago (green line, right axis, % change from year ago) from June 2013 to June 2018.

Why do we argue that the rise in unemployment is positive? Well, the rate increased because more than 600,000 people entered the labor force, including more than 200,000 reentrants and many teens, as the school year ended. As a result, the labor force participation rate edged up from 62.7 to 62.9 percent over the month. It means that the formerly discouraged workers have become optimistic about the prospects of finding work and thus have started to search for it again. It’s good news for the U.S. economy and the monetary hawks among the FOMC members and, thus, negative for gold.

However, the participation rate still remains significantly below the pre-crisis level, as the chart below shows.

Chart 2: U.S. Civilian Labor Force Participation Rate over the last ten years.

It implies that there is still some slack in the U.S. labor market. The Fed is, thus, likely to continue its gradual approach to the normalization of its monetary policy. Investors seem to like a gradual and well-telegraphed tightening cycle, so the safe-haven demand for gold will remain limited.

Job Creation Remains Strong

U.S. nonfarm payrolls disappointed in March. The economy added 213,000 jobs last month, while the markets had expected 200,000. The gains were widespread – however, job creation was the strongest in education and health services (+54,000) and professional and business services (+50,000). Interestingly, retail trade cut almost 22,000 jobs.

The June increase in total payrolls followed a rise of 244,000 in May (after an upward revision). Moreover, with revisions, employment gains in April and May combined were 37,000 more than previously reported. In consequence, job gains have averaged 202,000 over the last three months, substantially above the level needed for a gradual tightening of the labor market. And, although the pace of job creations has declined somewhat in June, it has remained positive, and in an upward trend since the fall, as Chart 1 shows.

Implication for Gold

The U.S. central bank should welcome the recent employment report, which is positive overall. Job creation remained strong. Unemployment rose, but it was because of more people entering the labor force. The average hourly earnings rose by 5 cents to $26.98, which implies that they have increased 2.7 percent over the year. Although it’s the same percent change as in May and it missed the expectations of economists, wages are rising gradually. Hence, the U.S. labor market tightened further. It should not radically alter the Fed’s stance, but it should justify and cement the current hawkishapproach. It means another interest rate hike in September.

Moreover, there are signs that GDP growth rebounded in the second quarter and it is likely to be better in the second half of 2018, outpacing other advanced economies (which supports the U.S. dollar). And inflation has recently hit the Fed’s 2-percent target. Overall, the economy is strong and the incoming data should keep the Fed on course to raise interest rates twice by year-end. Gold bulls cannot, thus, count on the labor market’s support.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

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